Watchdog warns auditors their report card shows standards slipping

Date: December 04 2012

Gareth Hutchens and Lucy Battersby

THE corporate regulator has taken aim at the auditing community, warning it is ''on notice'' and needs to lift its game, after a review found a serious deterioration in the quality of audits over the past two years.

Australian Securities and Investments Commission head Greg Medcraft says too many audits are being signed off without sufficient ''audit evidence'', and auditors generally are not being sceptical enough when auditing companies' books.

Mr Medcraft said ASIC would release an audit inspection report card on Tuesday morning, which showed a ''significant deterioration'' in the quality of audits over the past 18 months.

The report comes after a series of company collapses - such as Centro, Trio Capital, and Banksia - in which auditor failure or oversight problems were a big issue. In Banksia's case, accounts were signed off by the group's auditors only a few weeks before the group collapsed owing investors more than $660 million.

''This is a second strike for the audit sector and the industry should consider itself on notice,'' Mr Medcraft said.

Mr Medcraft said the report showed that, in 18 per cent of 602 key audit areas, reviewed auditors did not get sufficient audit evidence or exercise appropriate scepticism.

He said the number of such problems at large firms had increased from 10 per cent to 13 per cent, an increase of 30 per cent, over the inspection period. For smaller firms, the number increased from 18 per cent to 21 per cent.

''One in five is not a statistical outlier. This is poor quality,'' he said.

''The [profession] has really got to throw everything at it in the next 12 months to get that number down … otherwise, we'll need to think about what else can be done. There has been talk about the rotation of order firms, bringing in a fresh set of eyes.''

ASIC is also concerned providers of contracts for difference (CFD) - a high-risk trading strategy - are not properly segregating their clients' money. Nearly half the 40 firms surveyed by ASIC since December 2011 do not properly designate client accounts as ''trust accounts'' and nearly 30 per cent did not pay client money into a compliant account the day after receiving it.

ASIC was also surprised at the amount of money CFD providers held - $511 million - and recommended clients consider the ''opportunity cost'' of leaving large sums of money in a CFD trading account; particularly given only 11 per cent was used for margin trades and the rest was often invested in term deposits. The 10 largest CFD providers hold 90 per cent of client money and ASIC noted the ''growth in the number of CFD issuers has not been matched by an equivalent rise in the uptake of CFD products by retail investors''.

Asked about high-frequency trading, ASIC deputy chairman Belinda Gibson said there was no evidence Australian markets were manipulated by ''front-running'' - making a trade before executing a customer's trade - or ''quote stuffing'' - blocking trades through large volumes.

''High-frequency trading is not going to kill this market, I don't think,'' she said. There was a problem, however, with ''badly designed algorithms''.

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